The federal solar investment income tax credit (ITC) has been in place since 2005 and has helped support the growth of solar energy across the country. The credit has allowed homeowners and commercial entities to deduct a significant portion of the cost of their solar panel installation from their income taxes - 26% in 2020. The tax credit is stepping down over the next two years and will sunset completely for residential systems while remaining at a permanent 10% for commercial and utility systems.
For homeowners, the guidelines are clear that they need to have their system installed and placed in service by the end of the 2020 to be eligible for the 26% ITC. It is less clear what the requirements are for commercial projects to be able to claim the tax credit for 2020 projects. This blog post will cover the concept of safe harbor and how Namasté Solar can help commercial projects ensure eligibility for the 26% solar tax credit before it steps down to 22% in 2021.
Finding Safe Harbor
The IRS has established a provision to the ITC tax law called safe harbor, which allows customers to preserve the tax credit of the current year by beginning construction on a solar project. The definition of what beginning construction means is at the heart of safe harbor and is what a prospective solar buyer should be aware of in considering a safe harbor strategy. There are two approaches that qualify as beginning construction that will ensure a project has achieved safe harbor and has secured the tax credit for that year. The first safe harbor strategy is to incur 5% of total project cost, and the second is to begin physical work of a significant nature on a project. Both are considered acceptable proof of beginning construction and demonstrate that work has been initiated.
Incur 5% of Total Project Cost
A commercial solar project can say construction began on their project in 2020 if they incur at least 5% of the project cost in 2020. The project cost refers to cost of the portion of the facility that qualifies for five-year accelerated depreciation: panels, racking, and inverters. The requirement for this varies based on the accounting method of the project owner and has specific standards that must be met to ensure safe harbor. To safeguard against price fluctuations, Namasté Solar recommends incurring 7% of total project cost to ensure safe harbor.
Begin Physical Work of a Significant Nature
Physical work of a significant nature refers to evidence that work has started on something qualitatively significant. Both on-site and off-site work is considered acceptable, and can be performed by the project owner, a contractor, or a subcontractor, but a binding contract must be in place that demonstrates assumption of risk. This option also refers to the procurement of components specific to the project which are not normally held in the manufacturer’s inventory, such as custom racking, carports, and transformers. Assuming the work performed is of a significant nature, there is no fixed minimum amount of work, monetary amount, or percentage threshold required to satisfy the physical work test.
Namasté Solar Can Safe Harbor Your Project
The best safe harbor strategy will depend on the individual characteristics of your project. Namasté Solar can help evaluate your options and determine which strategy is the best course of action to ensure you secure the maximum possible tax credit for your project. We successfully achieved safe harbor for 4 projects in 2019, assuring our clients could maximize their tax benefit. Our experienced solar advisors will work with you to understand your project goals, timelines, and milestones, as well as your company’s financial position, accounting method, and risk profile. Contact one of our non-commissioned solar experts today to start a conversation.